Panel 1C: Canadian Companies in Investment Treaty Arbitration
November 18, 2014
King and Spalding
University of Victoria
This panel addressed the kinds of legitimate regulatory action States can take within the purview of Bilateral Investment Treaties (BITs) and Investor-State Dispute Resolution (ISDS) in relation to resource and extractive activities. The Chair, Viren Mascarenhas, gave a brief introduction outlining the scope and importance of understanding and appreciating the growth in BITs. Since the 1950s, when the first BIT was signed with an Arbitration Clause, there has been a proliferation numbering in the thousands. While Canada has only ratified 27 Foreign Investment Promotion and Protection Agreements (FIPAs), there are many more on the horizon. Mascarenhas highlighted that investor protection under BITs or Canada’s FIPAs grant certain international law protection for investors, as a way to balance the promotion of projects and investments that require capital intensive, sunk cost investments. These protections provide that an investor will not be treated in a discriminatory manner vis-à-vis national investors or other foreign investors. This does not, however, eliminate the regulatory space that sovereign States have to enact social, environmental, or public policy measures. The two main protections discussed by the panel are Fair and Equitable Treatment (FET) and Expropriation.
Jean-Michel Marcoux’s presentation focused on the experience of Canadian companies in ISDS by looking at three main cases: EnCana v. Ecuador, Glamis Gold v. United States, and Vanessa Ventures v. Venezuela. Marcoux noted the unifying trend in the three cases illustrates that host countries can take regulatory action to maximize developmental benefits without breaching their obligations under BITs. He added that a recent Arbitration Award in Gold Reserve v. Venezuela was decided in favour of the investor, but that it does not constitute a major deviation. Marcoux established that a high threshold has been set to prove an Expropriation claim and to establish a violation of Fair and Equitable Treatment (FET), giving states sufficient policy space for discretion. The issue in EnCana was evaluating taxation measures against claims by an investor of expropriatory taxation. Marcoux went on to elaborate that many BITs generally exclude taxation measures as it is an important function of state regulatory discretion. Glamis Gold, meanwhile, illustrates the kind of regulatory space states have when enacting social or environmental measures. He elaborated that given the potential environmental and social harm that can result from energy sector, resource, and extractive activities such as landslides, gas flaring, polluted water, and acid rain to name a few, there is an urgency in assessing the litigation exposure under ISDS that states face in enacting regulation. At issue in Glamis Gold was state and federal measures addressing Indian traditions and environmental regulation requiring backfilling of mines. The Tribunal evaluated claims under expropriation and FET. In Vanessa Ventures, the Tribunal addressed the issue of an investor’s contractual obligations and whether a breach could justify certain state recourses. Marcoux ended his presentation by affirming that countries can enact tax, social and environmental measures to achieve maximum gains from investments with carefully crafted measures to avoid breach of their international obligations under BITs.
Shane Spelliscy gave Canada’s negotiating perspective when it comes to taxation protection and carve-outs in BITs. He noted that tax is a general carve-out for most BITs, with Canada adding back some carve-ins for its BITs to give investors protections from measures that are not for legitimate tax purposes, but rather an expropriation. Canada has included an Annex on expropriation in its recent BITs to give greater clarity and direction to Tribunals on expropriation. So while certain tax measures are normally discriminatory by design, such as income tax, there can be less justification for a grossly discriminatory sales tax. Spelliscy focused on the factual determinations that Tribunals must make in ISDS and determinations on legitimate policy objectives. He added that generally, so long as there is no arbitrary, or unjust treatment falling below the minimum standard of treatment, States have regulatory discretion. Entering into BITs with ISDS does not hamper this state discretion on taxation. He gave the example of avenues for state-state cooperation on taxation, such as an evaluation by authorities of the two BIT States to determine where a taxation measure is expropriatory, as was done in the NAFTA Gottlieb case.